Thread by @AswathDamodaran

I use Facebook's most recent (disappointing) quarterly earnings report as an entree to a discussion of accounting inconsistencies in expensing, especially on leases and R&D, and why they skew profitability, return and debt measures at businesses. bit.ly/3UJCiaX

In Accounting 101, expenses are categorized into operating, capital and financing expenses, and the categorization determines where these expenses show up in the financial statements, and what those statements tell us about the business. bit.ly/3UJCiaX

When a financing expense (like leases) is mis-categorized as an operating expense, standard accounting practice until 2019, operating income and debt at firms will be understated, affecting operating margins & ROIC. bit.ly/3UJCiaX

When a capital expense is mis-categorized as an operating expense, still standard accounting practice, you will skew operating & net income down at most firms and take your biggest asset off the balance sheet & out of book equity. bit.ly/3UJCiaX

Correcting for accounting mis-categorizations of operating and capital expense is not nit-picking. It has consequences for both valuation and pricing, altering your perspective on companies and changing your valuation & pricing judgments. bit.ly/3UJCiaX

Facebook not only spent a massive amount on R&D in the last 12 months ($32 billion+), but has also increased that spending manifold over the last five years. Capitalizing R&D creates a significant asset ($53 billion+) and augments book equity. bit.ly/3UJCiaX

Capitalizing R&D at Facebook increases income by $13.7 billion, increasing operating income in the last 12 months from $35.54 billion to $49.26 billion and net income from $28.8 billion to $42.5 billion; operating margin increases from 30.1% to 41.7%. bit.ly/3UJCiaX

Facebook's R&D does not include a big chunk of the company's bet on the Metaverse, and adjusting for that bet (by removing the revenues and expenses associated with Reality Labs) remakes Facebook's profit picture. bit.ly/3UJCiaX

None of this is directed towards convincing you that FB is cheap or expensive. The truth is that whether you find $FB cheap or expensive right now rests almost entirely on how you think FB's huge investments on the Metaverse will play out. bit.ly/3UJCiaX

Investors seem to have lost all trust in Facebook to deliver value on the Metaverse investment and I blame FB. Telling the world that you plan to invest $100 billion over a decade, without explaining how you plan to make money is not a great story line. bit.ly/3UJCiaX